The FCA’s market study into asset management

On 18 November 2015, the Financial Conduct Authority (FCA) announced the Terms of Reference (ToR) of its long-awaited market study into asset management. This has been well-flagged since the FCA published the results of feedback from the wholesale sector competition review, which identified a number of ways in which competition in the asset management market may not be working well.

Those impacted by the market study should consider carefully how they should be engaging with it. To ignore it, or underestimate the potential wider implications, may prove costly in the long run.

What does the market study cover?

Essentially, the market study will consider whether competition is working effectively so as to enable retail and institutional investors to obtain value for money when they choose an asset manager.

The specific areas of focus which will be explored in the market study are:

How asset managers compete to deliver value: How do investors choose between asset managers? How does the current market structure affect competition? How do charges and costs differ along the value chain?

Whether asset managers are willing and able to control costs and quality along the value chain: Can investors monitor cost and quality of services paid for out of the fund? Do the incentives of service providers mean that they are incentivised to deliver value to end-investors (or to asset managers)?

The effect of investment consultants and other advisers on competition for institutional investment management: How does advice given by investment consultants affect competition for asset management? How are conflicts within the investment consultant business model managed? How effectively can investors monitor services provided by third party consultants?

The FCA will also consider whether and where any barriers to innovation or technological improvements exist which may be preventing investors from obtaining better value for money.

The main focus of the market study is on asset management services. However, to fully explore this area, the FCA will want to understand: distribution (platforms and investment consultants); asset management products and providers; and ancillary and third party service providers.

In terms of the specific products and services which will form the core focus of the market study, the ToR states that the FCA will “consider most types of collective investment funds and segregated mandates, irrespective of their legal structure. We will focus on funds and mandates that invest in mainstream asset classes (such as securities, derivatives and property)”. It will look at both actively managed funds and passive investment management. This will cover pooled investment funds, insurance-based investment products and segregated mandates (so, managed specifically for a single investor).

The geographic scope is limited to funds and mandates managed in the UK.

What does this mean to the asset management industry?

This is the second FCA market study in the “wholesale” financial space. The first, launched in May 2015, is looking at Corporate and Investment Banking. This reflects an increasing focus by the FCA on the impact of competition in the financial markets that it regulates.

At the end of the market study, the FCA will conclude whether or not the market for asset management is working well. If it concludes that it is not, it has a number of remedies available to it, including:

• market wide remedies, such as making rules or issuing guidance
• firm-specific remedies, such as variation or requirement powers, cancelling permissions or imposing financial penalties, and
• making a “Market Investigation Reference” to the Competition and Markets Authority (CMA), the UK competition authority, for a much more in-depth probe into certain features of the industry.

The FCA can also make use of its FSMA enforcement powers in relation to any issues that it uncovers in a market study. Since 01 April 2015, the FCA also now has the power to enforce competition law - so the prohibitions on anti-competitive agreements and abuse of dominance - concurrently with the CMA. Although the FCA has not yet taken any such enforcement action, it would not hesitate to do so if during the course of a market study it uncovered any behaviour which breached competition law.

What happens now?

The FCA will report on its preliminary findings in summer 2016, with a final report at the start of 2017. There is an initial opportunity now for those who may be impacted by the market study to make any submissions to the FCA on any topics raised by the ToR. This opportunity is open until 18 December 2015.

Following that, the FCA will begin to send information requests out to market participants.

Those who are likely to be affected by the market study should engage with it thoughtfully. The responses that the FCA receives to those information requests will influence the type and level of any concerns going forward, so careful consideration should be given to what those responses show.

Equally, any organisation which feels that it is currently being prevented from competing effectively in the asset management space may see this market study as an opportunity to present any concerns to the FCA.

If you would like to discuss the new market study into asset management and what it might mean for your organisation, please speak to Peter Broadhurst, Charles Bankes.

Update

"A recording of our asset management marketing study client call and a more detailed analysis is available.